Why do companies (ie like AIB) engage in Share buybacks?

hamster

Anyone know a good answer to this one:

Why do companies (ie like AIB) engage in Share buybacks? ie, buy back their own shares, is it to increase the value of the companies when the share price rises?

Is this normally the case or is it done when the company perceives it's share price to be undervalued or "good value"?


Just wondering if anyone knows? Strange thing I noted as well is that once a buy-back programme is finished for the year or whatever the share price dips temporary afterwards. Why would this be perceives to be "negative" ?

Essentially, What are buy backs?

Ps. Myself, I tend to hold these things long term.

mike65

I think you may have answered your own question but I dont know if the AIB shares are cheap(ish) at the moment. Another possible reason to buy your own shares is to stop someone potentially hostile buying them and using those shares as a base to build from...

Mike.

dmeehan

i think the point of a share buyback is to increase the share price and therefore the markep capitalisation of the company.

when the buyback is complete, the price *probably* drops because of profit taking

well i think thats how it works?

well i suppose if they buy back more shares they wont have as much of a dividend to pay out

RainyDay

When they buy-back shares, they will cancel them - this reduces the overall quantity of shares which creates a corresponding increase in share price. It's really a way of giving money back to shareholders through share price increases (which are taxed at the 20% capital gains tax rate) rather than dividends (which are taxed as income, normally 42%).

To me, a share buy-back is a bit like a snake who starts eating his own tail - How far can he go?

Borzoi

This oftens happens with companies with large cash reserves and need something to do with it, so they (unimaginatively and low risk) buy back, as opposed to making aquisitions and growing the company that way.

So while buy back can be good, it can also be an opportunity lost

hamster

That's really interesting... so buybacks just reduce the number of shares out there. I suppose it does give existing shareholders increased value to their own shares. I guess it sucks in new buyers each time... so I guess it helps the longterm shareholder which is probably deserved.

LoneGunM@n

The issuing of shares is one of the best ways to source finance for capital spending.

As mentioned before, when a company is cash rich [thus not requiring finance for capital spending], it tends to reduce the shares in circulation, thus strenghtening the company from within.

With less shares in the public domain, the eps for the existing shareholders increases, thus driving the value of the shares upwards, which inturn increases the paper value of the company.

hamster

Yep,

I buy that one. Lowering the eps of the bank would make it look more attractive compared to it's peers. Although it shows little imagination from the bank's pov.

hamster

Fool have a good description of BuyBacks:

What's a share buyback?

As investing jargon goes a share buyback is one of the simplest terms. It's a company buying back its own shares. It can do this in one of two ways. The first, and by far the most common, is when a company buys shares on the open market, just as a private investor does when they buy shares through a broker. A company has to get authority from its shareholders in order to buy back its shares. Usually this is done at its Annual General Meeting.

Secondly, and far less common, a company can announce a tender offer. This involves all shareholders submitting a price they would be prepared to accept for their shares. In both instances once the company buy backs the shares it will cancel them, so they will cease to exist. Therefore a company cannot flog the same shares back onto the market at a later date.

Why do companies buy back their shares?

A company exists to allocate its resources in the most efficient manner for the benefit of its shareholders. Part of its resources may be surplus cash. Surplus cash is cash that it does not require to maintain or expand its business. It may decide to return this cash to its investors. This can be done either by a dividend or by buying back its shares. The decision as to which method is used usually depends on complex taxation issues that we can happily leave to the company's accountants.

In recent years there has been increased pressure from investment institutions for companies to return their surplus cash rather than sitting on it just in case they might need it for future acquisitions. The institutions argue that it should be their decision, and not the company's, to hold part of their assets in cash.

How does it affect shareholders?

As a general rule, share buybacks are good for shareholders. The laws of supply and demand would suggest that with fewer shares on the market, the share price would tend to rise. Although the company will see a fall in profits because it will no longer receive interest on the cash, this is more than made up for by the reduction in the number of shares. In effect you get more pie, as although the total size of the pie is reduced this is more than offset by the fact that you get a bigger slice.